Reliance on Advice of Counsel as a Defense to Securities Law Violations

The defendant in a rule 10b-5 action may believe that consultation of outside counsel should completely absolve it of liability for any wrongdoing, since relying on the advice of counsel should make existence of the necessary knowing or intentional misconduct impossible. It appears, however, that reliance on counsel's advice is not actually a defense, but is merely a factor to be considered in connection with a due care or good faith defense. Determination of when the so-called ''reliance defense'' should be available requires examination of 3 areas: 1. the nature of the securities law violation, 2. the nature of the reliance, and 3. the nature of the advice. If the violation is one imposing strict liability, reliance is irrelevant. It is a factor to consider in connection with violations allowing due care or good faith defenses. The reliance defense requires consideration of selection of counsel, disclosure of information to counsel, receipt of advice, and action taken in accordance with the advice. The sole test available is reasonableness. Advice as to facts is not subject to the reliance defense, while advice as to mixed questions of fact and law is sometimes subject to the defense. Debate continues on this subject.